Personal Finance

Blue states file suit against federal government over SALT caps

Key Points
  • The Tax Cuts and Jobs Act places a $10,000 cap on the state and local tax deduction.
  • New York, New Jersey, Maryland and Connecticut filed suit against the federal government on Tuesday morning.
  • Andrew Cuomo, governor of New York, alleged that the federal tax law will cost New Yorkers $14.3 billion in 2018 alone.
Andrew Cuomo
Daniel Acker | Bloomberg | Getty Images

New York, Connecticut, Maryland and New Jersey are suing the federal government, alleging that the new $10,000 cap on state and local tax deductions (SALT) is an “unconstitutional assault on states’ sovereign choices.”

New York governor Andrew Cuomo announced the lawsuit on Tuesday morning, naming Steven Mnuchin, U.S. Treasury Secretary, and David Kautter, acting commissioner of the Internal Revenue Service, among the defendants. The lawsuit was filed in the Southern District of New York.

“The federal government is hell-bent on using New York as a piggy bank to pay for corporate tax cuts and I will not stand for it,” said Cuomo.

A Treasury Department spokesperson said the agency is reviewing the complaint.

The $10,000 limit on the SALT deduction was imposed as part of sweeping tax reform that took effect this year. In addition to permanently cutting the top corporate rate to 21 percent from 35 percent, lawmakers also reduced rates on individuals across the board and nearly doubled the standard deduction — although those changes are in effect only from 2018 through 2025.

At the same time, however, personal exemptions were eliminated and most deductions were axed. While the SALT deduction was retained, the $10,000 limit means homeowners in states with higher property taxes (and higher home values) will likely be impacted the most.

Cuomo claims that the elimination of the SALT deduction will cost New Yorkers $14.3 billion in 2018 alone and another $121 billion between 2019 and 2025.

More from Personal Finance
IRS may nix blue states’ workaround on tax deduction caps
High-tax states plan strategy in response to cap on SALT deduction
Treasury, IRS have set their sights on blue states’ tax workarounds

In 2015, the average SALT deduction for New Yorkers who claimed the break was more than $22,000, according to the Tax Policy Center. In New Jersey, the average deduction was around $18,000.

The tax break for state and local taxes dates back to 1914, when a federal income tax was imposed after ratification of the 16th Amendment. Since then, the deduction has gone through various iterations, including changes to which taxes can count toward it.

As it stands, taxpayers with higher incomes will be affected the most by the cap. Of the 30 percent of people who took the SALT deduction in 2014, a majority (88 percent) of the benefit went to households with incomes above $100,000, according to 2017 study by the Tax Foundation.

“This lawsuit probably won’t go anywhere,” said Joseph Bishop-Henchman, executive vice president at the Tax Foundation. “But they can go to angry high-income people and say we tried to do something.”